Have you ever heard that you only need a 5% down payment? Sorry, but you will probably need more!
So How Much?
The rule of thumb for purchasing an owner-occupied home is 6.5%: 5% for your down payment and 1.5% for closing costs (i.e. lawyer fees, potential land transfer tax, title insurance, and PST on mortgage default insurance). The 1.5% needs to be shown whether you’re a first-time buyer or not.
Pro tip: With the ever-increasing home prices, know that your minimum down payment has to increase for purchases over $500K. This looks like 5% of the first $500K plus 10% of everything after that and don’t forget about your 1.5% on the total purchase.
For a home purchase of $650K, you would therefore need 5% of $500K (which is $25K), plus 10% on $150K (which is $15K), plus your 1.5% of the $650K (which is $9,750). All in all, you’re looking at a grand total of $49,750 for the down payment and closing costs on a $650K home. This total is $17,250 higher than $32,500 (5% of $650K) and is a significant financial difference for most buyers.
You’ll want to find a budgeting system that works for you and stick to it! Pick a percentage of your income to save every month, this will help you substantially when it’s time for your down payment. If you need $50K, that’s just over two years (25 months) of saving $2K/month. If you and your partner make $50K each, have modest rent, and lead an at-home lifestyle… this is easier than you might think. The important part is to set your goal and create a habit that you can stay accountable to.
Income and Taxes
It’s also important to remember how taxes and different income situations factor into the mortgage application because a salaried employee is treated differently than a sole proprietor. If you fall into this latter category (or are someone in the ‘gig economy’, business for self space, and in some cases corporation owners), we take a two-year average of income for your mortgage application.
It’s important to note here that it’s not an average of the money you made (i.e. your revenue) but an average of the money you reported to the government as personal income. A self-employed client once called with the news that they cleared over $100K that year, paid the tax on it, and were looking to buy their first home. I congratulated them on their success but, as always for our self-employed folks, we needed a two-year average. Given that their previous year’s income was only $50K, the lender would calculate the average as $150K ($100K + $50K) over two years, or $75K per year.
Note: The reason we look at this so far ahead of time is that any changes also need to make sense. If someone instantly doubles their income, this could pose a red flag to the lender.
Pro tip: Remember, when we calculate how much mortgage you can afford, we can use other forms of income such as child benefit payments (CCB), child and/or spousal support, maternity leave etc.
In terms of qualification, and based on the current mortgage landscape, a rule of thumb is to multiply income by 3.8. Take the gross income and multiply it by 3.8 to figure out how much mortgage you can afford. Now, add your down payment amount to that number and that’s the purchase price you should be looking at. So, with an average income of $75K per year, we get 3.8 x $75K or $285K. Add in a 5% down payment on that total and we end up with a purchase price of just over $299K.
Disclaimer: This 3.8x is just a rule of thumb and doesn’t take into account other factors like condo fees, additional taxes or debts you may have. We’re also assuming you’re putting down less than 20%. If you can get to 20% down, then we can look at alternative lending and other options to get you more out of your income.
Contact the Kyle Miller Mortgage Agent team to learn about how your income and tax situation plays into your mortgage qualification process!
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